Are you thinking about investing in Premium Bonds, but aren’t entirely sure whether it is a worthwhile investment? Read on to find out all there is to know about buying Premium Bonds with NS&I - the Premium Bond provider.
To some of you, Premium Bonds may be nothing more than something you’ve heard of when playing Monopoly. In contrast, some of you may have a fair bit of money invested in them, or remember them from your childhood. Wherever you sit on that broad spectrum, it is always useful to know what investments are currently on the market. Even more importantly, it is essential to understand whether some investments are worth it or not.
Here, we dive into whether it is worth investing in Premium Bonds. In doing so, we fully explain what one is and then what the advantages or disadvantages surrounding them are.
What is a Premium Bond?
Premium Bonds are a type of bond sold by National Savings and Investments (NS&I). Each Premium Bond can be bought for £1, and each one is assigned a number. Every Premium Bond number is put into a monthly draw with the chance of winning a cash prize.
There are several cash prizes to be won each month, and they can be substantial. Prizes start at £25, but the biggest cash prize goes up to £1million. It is perhaps the chance of winning £1 million that makes Premium Bonds one of the most popular investments in the UK.
The biggest amount that you can invest in Premium Bonds is £50,000.
Advantages of Premium Bonds
The following advantages of Premium Bonds are what help make them so popular. Remember, however, that any benefits do not make them a good investment for you automatically. Consider them alongside the disadvantages and your needs.
If you are lucky enough to win any cash prizes, those prizes tax-free. Strictly speaking, the only other tax-free investments you can make are ISAs. So finding another investment (outside of your tax-efficient pension pot) is a big bonus. However, remember, you have to win something first for those tax efficiencies to be made.
It is usually pretty risky to say that an investment is riskless. However, with Premium Bonds, your investment is backed by HM Treasury, so your original investment amount is safe. You can be sure that you will always be able to get that money back if you want it.
There’s no denying that the biggest draw to Premium Bonds is that you can win £1 million. Tax-free. That is a life-changing amount of money that would make a big difference to your pension and retirement as well as the rest of your family.
Disadvantages of Premium Bonds
Sadly, the list of the disadvantages of Premium Bonds is far longer than its advantages. Plus, when you compare them to most other investments out there, there is very little to recommend them above other options.
Small chance of winning
The main draw of Premium Bonds is the big cash prize. However, it is also its biggest downfall. It's important to remember how small a chance you have of winning anything. In fact, for every £1 Premium Bond you own, you have a 34,500 to 1 chance of winning a prize. And that prize could simply be £25.
People invest in Premium Bonds with the hope of winning big. Many forget that while they own a Premium Bond, their money will not be earning any interest. Buying Premium Bonds is almost like opening up a zero rate bank account. It’s a big drawback given that interest or return can be earned on so many other investment products.
Varying prize pool amount
If you are still attracted to the prize element of the Premium Bonds scheme, remember as well that the size of the prize pool varies. It goes up as well as down. The number of prizes is currently around a million lower than what it was just two months ago. That’s a significant change and seriously impacts your ability to win.
Buying Premium Bonds is often considered an ineffective investment due to inflation. Inflation has a significant impact on any portfolio's real return. As Premium Bonds will not earn any interest, they will lose purchasing power as inflation increases the price of goods. Therefore, if you do not win anything on your Premium Bonds, you are technically losing money by keeping hold of them.
Things to consider when buying Premium Bonds
Despite the long list of disadvantages of Premium Bonds, some circumstances may make them a suitable investment. To figure that out, you have to weigh up the pros and cons of Premium Bonds in relation to your circumstances. Bear in mind other investments you have, what income you have coming in and what expenses you have to pay. Additionally, you need to look at your investment timeline. Piecing all these bits of information helps create a risk profile for you. From there, you can think about whether Premium Bonds are a good match for you.
Finally, you need to question whether other investment products on the market are more suited to your needs and requirements. Given the zero rates of interest earned on NS&I bonds, coupled with the minuscule chance of winning the big jackpot, the answer is probably yes.